I’ve been a business journalist for 25 years, for publications including Crain’s New York, BBC Capital, CNBC and others. I write for Stanford’s GSB, too, where I learn a lot about the entrepreneurial mind. In addition to writing about how startup ideology and technology advances are fueling an international age of entrepreneurship, I also write about how money drives this movement. What roles are angels, VCs and private equity playing, and how are governments and nonprofits hurting and helping? On the side, I have a personal business blog about freelancing at 200kfreelancer.com.

Jim Cramer Vs. The Private Equity Magnate

A few months ago, David Rubenstein, co-founder of private equity powerhouse The Carlyle Group, was on air with Jim Cramer, the host of Mad Money, explaining the good qualities of his business to a scoffing Cramer.

‘They create jobs,” Rubenstein, a billionaire, said of venture capitalists, one part of the complicated private equity world. (Probably sensing a losing battle, Rubenstein wasn’t even trying to defend the other half of the world, the buyout managers).

The exchange between the two men seems to capture the unease with which many people view private equity. We remember the barbarians and raiders of the 1980s. (And, to a lesser extent, the shark-like venture capitalists who walked away from the 1990s tech boom with billions while most Americans were left with stock in … Pets.com).

But fast forward a few decades. Private equity has grown up. There are four large public companies, KKR, the Carlyle Group, Blackstone and Apollo Global Management that sell their products — funds — mostly to institutional investors but increasingly to smaller individual investors. And there, are a growing number of small private equity players, including some interesting tech platforms, that will enable you to get involved in venture capital or buyout investing. I recently interviewed the CEO of CircleUpCircleUp, a company in California in which Clay Christiansen, the Harvard Business School professor has invested through his hedge fund, Rose Park.

Most successful entrepreneurs or professionals will probably get the chance to make a private equity investment sooner or later. So here are some things to keep in mind about this still-nascent industry and form of investing.

• The defining characteristic of private equity, whether you’re buying from a fund company, through an investment advisor, or through one of the new technology platforms, is its illiquidity. You are committing your money for a certain number of years — often 5, 7 or 10 years — with no expectation of any return until that time is up.

• Many private equity funds fall into the two main parts of the industry: 1. Buyout funds, which invest in or lend to mature companies, often ailing ones, and 2. Venture capital funds, which invest in startups. In either case, they are aiming for a big exit for the companies in their funds — that means either an acquisition or an IPO. But many of the investee companies wither and die, producing negative returns — that’s why private equity investing is so risky.

• There are many other kinds of funds, which can invest in anything from oil fields to Russian timber. So, don’t assume anything from the label “private equity.” Even more than in other kinds of investing, it’s important to understand what you’re getting into.

• Private equity has had historically high returns. The Cambridge Associates Global Buyout and Global Growth Equity Index showed a 13.51% return over 25 years ending Dec. 31, 2013. But, as competition within the private equity space has increased, the deals that produced those rates of return are fewer and farther between. Alison J. Mass, theco-head of the Financial Sponsors Group, Investment Banking Division of Goldman Sachs, recently said there were now 500 funds worldwide with assets of more than $1 billion.

• The fees historically have been high. A phrase you hear a lot in private equity is “2 and 20″ which means that you pay a 2% management fee on the money you invest, and then the fund managers take 20% of the profits at the end. But the increasing competition and the new entrants may put pressure on those fees. CircleUp allows accredited investors (an SEC definition that requires $200,000 of income or $1 million in assets outside your home) to put money into consumer brand companies. It charges no fee to investors, who typically put a five-figure sum into the companies in exchange for equity. CircleUp makes money from the companies who list on its platform, according to its CEO, Ryan Caldbeck, who is also a FORBES contributor.

• The industry is changing fast. Not only are there new entrants like CircleUp, but the big fund companies are adapting fast, too, opening their funds to smaller investors. Just a few years ago $250,000 or more was the ticket price to be a private equity investor. Early this month, Pantheon, another firm, opened the door to investors with $50,000, and Carlyle has said that it is targeting those who can invest$100,000. And some fund companies have made inroads with 401(k) plan providers, so you might see a private equity fund show up as an option in your plan.

• Private equity investing, because of its illiquidity, lack of transparency and the nature of many of its underlying investments, is riskier than investing in stocks. So measure the return you want against what you could get in the public markets. If you could get 6% a year in the public markets, net of fees, you might want 8-10% for bearing the extra risks of private equity, net of fees. Alice Handy, the CEO of Charlottesville, Va.–based Investure, one of the top institutional managers in the country, told me she looks for a 4% return over the public markets.

David M. Rubenstein, Co-Founder and Managing Director, Carlyle Group

What’s fascinating about seeing private equity grow up is that the barbarians are now giving a nod to the idea that they have responsibilities to something other than money … like jobs. Hence, you have David Rubenstein telling Jim Cramer (not in so many words): We are good guys, after all.

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